The race to net zero by 2050: avoiding unintended consequences

Organisations around the world are rallying to show their commitment to achieving net zero emissions by 2050. 

This race against time requires organisations to undertake a holistic evaluation of their decarbonisation strategies and operations for ESG risks to identify and avoid unintended negative impacts on human rights. Failure to do so may have significant financial consequences, including termination of supply or lending agreements, divestment, litigation and consumer backlash. Australian businesses should take action now.

The issue

Research shows that in the race to net zero, companies may be unintentionally exposing themselves and their stakeholders to adverse human rights risks and impacts.

High emitting companies adopting strategies for transitioning to low carbon operations have collectively been shown they could improve action to identify, prepare for and mitigate social impacts of these strategies.[1] A 2021 study by the World Benchmarking Alliance found that companies need to do better across all of the Alliance’s ‘just transition’ metrics,[2] including reskilling workers to mitigate the risk of a stranded workforce[3] and demonstrating a fundamental commitment to respecting human rights by identifying and managing human rights risks as required by the United Nations Guiding Principles on Business and Human Rights.[4]

The renewable energy sector, while rising to the challenge of climate change, has also been shown to be at risk of adverse human rights impacts.[5] Over 200 allegations of serious human rights violations linked to renewable energy projects were recorded by the Business and Human Rights Resource Centre in the last ten years, including land and water grabs, violation of the rights of indigenous peoples and the denial of workers’ rights to decent work and a living wage. Of those allegations, 44% are from the wind and solar sectors.[6]

‘Green jobs’ are increasingly being exposed as having attendant human rights risks. This includes the manufacture of solar panels, many of which are made, or have components that are made, in Xinjiang province in China. The US considers the risk of human rights violations in this region to be so great that it has banned the importation of goods from Xinjiang unless importers can prove no forced labour was used.[7] More than 50% of the world’s cobalt reserves, essential for lithium-ion battery manufacture, are found in the Democratic Republic of Congo, which is identified as being at high risk for corruption and labour exploitation, including child labour.[8] Further, the UK’s Health and Safety Executive has found that fatalities in the waste and recycling sector are 17 times higher than the average across most other industries.[9]

Drivers for better identification and management of social risks

Transitioning to clean energy at the pace required to achieve net zero by 2050 will require significant capital flows to be directed toward the renewable energy sector. Last year in Australia alone we saw a net shift of approximately A$60 billion of assets under management toward responsible investment strategies.[10] With this shift, we expect Australian investors will increasingly demand that the entities and projects they are funding not only demonstrate the positive environmental and social impacts of their business operations, but also identify and mitigate both environmental and social risks in those operations and their supply chains.

We have already seen a heightened focus by industry participants, including project sponsors, financiers and energy off-takers on these issues with contractual arrangements now more frequently mandating far more stringent and prescriptive obligations on counterparties to ensure appropriate plans and policies are both in place and adhered to so as to mitigate against these risks.

Australian organisations will also face pressure internationally. In 2020, the EU represented Australia’s seventh largest export destination and second largest source of foreign investment.[11] With the commencement of EU taxonomy directed to promoting sustainable green investment by classifying and reporting on environmentally sustainable activities – and the EU’s foreshadowed introduction of mandatory environmental and human rights due diligence regime and various mandatory national human rights and/or environmental reporting and due diligence regimes including France,[12] Germany,[13] Norway[14] and the Netherlands,[15] – Australian organisations can expect increased scrutiny of both positive and negative social and environmental impacts in their supply chains from EU based trading partners and investors.

This year, Australian organisations will not only face pressure to extend examination of their supply chains to second and third tier suppliers for modern slavery risks for the purposes of 2022 Modern Slavery reporting requirements, but they are likely to face international pressure to expand that scrutiny to operational social and environmental impacts more broadly.

How can organisations respond? The dos and don’ts

Do:

• understand that positive and negative ESG assessments include the impact of ESG risks on the organisation’s operations, as well as the risk of the organisation’s operations on ESG topics relevant to the organisation’s stakeholders;
  
  
• ensure the organisation’s strategy defines the ESG principles, performance goals and risk appetite relevant to operations and strategy;
  
  
• take an integrated and cross-functional approach to identifying ESG risks in both strategy and BAU operations;
  
  
• embed ESG risk management and compliance across the organisation’s policies and processes (integrated in day-to-day activities where possible, to encourage a culture of ESG compliance);
  
  
• seek expert advice when necessary;
  
  
• map the organisation’s stakeholders, both internal and external, and engage with them to identify their expectations and where different groups of stakeholders might have conflicting expectations;
  
  
• scrutinise supply chains beyond first tier suppliers;
  
  
• develop strategies to manage the consequences when ESG risks materialise;
  
  
• measure impact (positive and negative); and
  
  
• understand the ESG reporting requirements of your trading partners and investors and be prepared to provide data and information to enable them to report under mandatory reporting regimes.

Don’t:

• take a siloed approach to identifying, E, S and G risks;
  
  
• fail to consider the consequences of preferring one E, S or G goal over another conflicting goal;
  
  
• delay seeking expert advice to assist in mitigating risks or managing adverse consequences; or
  
  
• ignore the global shift to mandatory reporting of environmental and social impacts.

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ESG: A guide for General Counsel assists General Counsel (GCs) to identify, assess and capitalise on ESG opportunities and to develop a leading ESG risk and compliance culture across their organisation.